Citation: 2007TCC91
Date: 20070504
Dockets: 2004-2693(IT)G
2004-2792(IT)G
BETWEEN:
YVONNETTE CÔTÉ-LÉTOURNEAU,
MARCEL LÉTOURNEAU,
Appellants,
and
HER MAJESTY THE QUEEN,
Respondent.
REASONS FOR JUDGMENTS
Tardif J.
[1] These appeals pertain to the 1998 taxation
year.
[2] The issues to be
determined are as follows:
Did the
Minister of National Revenue ("the Minister") correctly add $593,065
to the Appellant Marcel Létourneau's income and $600,539
to the Appelant Yvonnette
Côté-Létourneau's income as grossed-up dividends in accordance with
sections 84.1 and 82 of the Income Tax Act ("the
Act") for the 1998 taxation year, and did the Minister correctly grant the
Appellant Marcel
Létourneau a $79,056 dividend tax
credit and the Appellant Yvonnette
Côté-Létourneau a $80,052 dividend tax credit for that year?
[3] Since the instant
appeal is related to the appeal of Yvonnette Côté‑Létourneau in
Docket 2004‑2693(IT)G, the parties agreed that the evidence submitted in
the appeal of Marcel Létourneau (2004‑2792(IT)G) would avail for both
appeals.
[4] The facts set out in paragraphs 1 to 6, 9,
16 to 18, 21 and 22 of the Notice of Appeal and admitted to by the Respondent
provide a fairly good summary of the important facts on which the assessment
under appeal is based. They read:
[TRANSLATION]
1. Centre d'Hébergement St‑Joseph
("the Centre") incorporated on November 28, 1983, under Part 1A of the Companies Act.
2. Until early 1994, the only
outstanding shares of that corporation consisted of 1,000 Class "A" common
shares, held by the Appellant and his spouse Ms. Côté‑Létourneau in
equal amounts.
3. During the years 1994 and 1995, a
crystallization of Mr. Létourneau's shares in the Centre was effected within
the framework of section 110.6 of the Income Tax Act ("the
Act" or "the ITA"), on the basis of the advice of his then legal
counsel.
4. Specifically, in the course of
the year 1994, the Appellant sold, to the Centre, 250 Class "A"
shares of the Centre, having a paid-up capital of $250, an adjusted cost
base of $250, and a fair market value of $250,000. The consideration
received by the Appellant consisted of 250 Class "B" shares of
the Centre.
5. In the course of the year 1995,
the Appellant sold, to the Centre, 250 Class "A" shares of
the Centre having a paid-up capital of $250, an adjusted cost base of $250, and
a fair market value of $250,000. The consideration received by the Appellant
consisted of 250 Class "B" shares of the Centre.
6. The Class "B" shares
issued by the Centre were preferred, non-voting and non-participating shares.
. . .
9. It appears, from the documents
prepared by Mr. Létourneau's then legal counsel that, in particular, this plan
resulted concretely, as of March 18, 1998, in the incorporation of a new
corporation called 9061‑3175 Québec inc. ("9061").
. . .
16. Under
the [TRANSLATION] "Létourneau Family Trust" instrument drafted by Mr.
Létourneau's then legal counsel and, in particular, section 7 of the
instrument, which pertains to the powers of trustees, the trustees must
exercise their powers unanimously in relation to all acts and decisions to be
made under section 7.
17. Specifically, section 7.1.7 provides
that the voting rights and all rights connected to the ownership of shares can
only be exercised with the unanimous consent of all trustees.
18. The trustee Bertrand Wall is a
chartered accountant with Dagenais Cadieux LLP, whose office is
located at 511 Place D'Armes, Suite 500,
Montréal, Quebec H2Y 2W7.
. . .
21. On July 14, 2003, the Minister of
Revenue sent the Appellant Mr. Létourneau a notice of assessment claiming
the sum of $121,531.42 from him.
22. According to this notice of
assessment, the sale of Class "B" shares to 9061 generated a dividend
for the Appellant under section 84.1 of the Act.
[5] The Appellant also
submitted the following in paragraph 19 of his Notice of Appeal:
[TRANSLATION]
19. Bertrand Wall is
at arm's length from Mr. Létourneau [and] his spouse Yvonnette Côté-Létourneau
[6] The Respondent
denied this allegation; both parties agree that this constitutes the heart of
the controversy.
[7] As for the
Respondent, she made and confirmed the assessment on the basis of the following
very detailed assumptions of fact:
[TRANSLATION]
(a) Centre
d'Hébergement St-Joseph Inc. ("the Centre") operates a home and
health care centre for seniors, and incorporated on November 28, 1983, under Part 1A of the Companies
Act (Quebec).
(b) Until early
1994, the Appellant and his spouse Yvonnette Côté‑Létourneau each held
500 Class "A" voting shares of the Centre.
(c) The Appellant
and Yvonnette Côté‑Létourneau are Canadian residents.
(d) The Centre's
directors are the Appellant and Yvonnette Côté‑Létourneau.
The acquisition of the Class
"B" shares of the Centre by the Appellant and Yvonnette Côté‑Létourneau
(e) In the course
of the years 1994 and 1995, the Appellant and Yvonnette Côté‑Létourneau proceeded with the
"crystallization" of the capital gains deduction in respect of their
Class "A" share holdings in the Centre.
(f) Thus, the
Appellant and Yvonnette Côté‑Létourneau each disposed of their Class
"A" share holdings in the Centre, and the Centre received those
holdings. In consideration of this disposition, the Appellant and Ms. Côté‑Létourneau each received 500 newly issued non‑voting
Class "B" shares of the share capital of the Centre, and availed
themselves of subsection 85(1) of the Income Tax Act, in the following
manner:
|
February 22, 1994
|
Shares disposed of
·
250 Class
"A" shares
·
FMV: $250,000
·
ACB: $250
·
Paid-up capital $250
·
Agreed amount: $250,000
|
Consideration received
·
250 Class
"B" shares
|
|
January 5, 1995
|
·
250 Class
"A"
·
FMV: $250,000
·
ACB: $250
·
Paid-up capital: $250
|
·
250 Class
"B" shares
·
FMV: $250,000
|
(g) The 500 Class
"B" shares issued by the Centre and purchased by the Appellant are
preferred, redeemable, non-voting and non-participating.
(h) At the time of
acquiring the Class "B" shares, the Appellant was not at arm's length
from the Centre.
(i) In his income
tax returns for the taxation years 1994 and 1995, the Appellant reported
the following taxable capital gains and claimed the following capital gains
deduction in relation to the disposition of the Class "A"
shares:
|
|
1994
|
1995
|
TOTAL
|
|
Taxable gains:
|
$187,312.50
|
$187,312.50
|
$374,625
|
|
Capital gains deduction
under section 110.6 :
|
$187,313
|
$168,526
|
$355,839
|
(j) On January 5,
1995, the Centre issued 500 new Class "A" voting shares to the
Appellant and another 500 to Yvonnette Côté‑Létourneau.
The
1998 tax planning
(k) In
early 1998, Serge M. Racine, a lawyer, prepared a tax plan for the Appellant
and Ms. Côté‑Létourneau. This plan resulted in the withdrawal, by
the couple, of $500,000 each from the Centre, for a total withdrawal of
$1,000,000, without tax consequences.
(l) This tax plan
is discussed in a document signed by Serge M. Racine, and dated April 9, 1998.
(m) Under the plan, inter
alia,
·
a corporation would
be created to acquire some of the Centre's participating shares;
·
a trust would be
created, having the Appellant, Ms. Côté‑Létourneau, and an unrelated
third party as trustees, and the new corporation as beneficiary;
·
the trust would hold the
shares of the newly created corporation;
·
a part of the fair
market value of the Centre would be transferred to a new corporation by means
of the disposition, by the Appellant and Ms. Côté‑Létourneau, of
shares held by them in the share capital of the Centre, in such a manner that the
corporation receiving these shares would not be related to the Appellant or Ms.
Côté‑Létourneau (but ultimately, it was); and
·
the newly created
corporation would pay the Appellant and Ms. Côté‑ Létourneau
for these shares by issuing a promissory note payable in the form of dividends,
or by means of a repurchase, by the Centre, of the acquired shares.
The creation of 9061‑3175 Québec
Inc.
(n) On March 18,
1998, 9061‑3175 Québec Inc. ("9061") was incorporated under
Part 1A of the Companies Act (Quebec).
(o) The Appellant
was the sole director of 9061 throughout the relevant period.
(p) According to
9061's T2 tax returns for the years ended March 31, 1999, to
March 31, 2002, Yvonnette Côté‑Létourneau was the president of 9061.
The creation of the
Létourneau Family Trust on March 30, 1998
(q) On March 30, 1998, the Létourneau Family Trust was created by the
lawyer Serge M. Racine and had the following trustees and
beneficiaries:
|
Trustees
|
Beneficiary
or beneficiaries
|
|
·
Appellant
·
Yvonnette Côté‑Létourneau
·
Bertrand Wall
|
·
9061
- Upon the liquidation of 9061, the
last shareholders to be listed in 9061's registers
|
(r) The trustees of
the Létourneau Family Trust were to hold and administer the trust property and were
to exercise unanimously the powers set out in section 7.1 of the trust
instrument of March 30, 1998, notably with respect to the voting of
the Trust's shares.
(s) Bertrand Wall is
a chartered accountant with the firm of Dagenais Cadieux LLP. The
firm reviewed the financial statements of 9061 and the Centre, and prepared the
financial statements of those corporations and of the Appellant and Ms. Côté‑Létourneau
for the 1998, 1999, 2000, 2001 and 2002 taxation years, among others.
(t) Section 10.3 of
the trust instrument of March 30, 1998, stipulates that the trustees can renounce
their charge after accepting it, and do not need a court's authorization to do
so.
(u) According to
section 10.6 of the trust instrument, the trustees may effect a general
delegation of their powers to those of their co-trustees who are neither the
settlor nor a beneficiary.
(v) The
accountant Bertrand Wall either delegated his powers and obligations to the
Appellant and Yvonnette Côté‑Létourneau as contemplated in
section 10.6 of the trust instrument, or renounced his charge as
contemplated in section 10.3 thereof, and therefore, at all times, only
the Appellant and Yvonnette Côté‑Létourneau controlled the Trust.
(w) Bertrand Wall told
the following facts to Marie‑Claude Poitras of the tax avoidance section
of the Québec Tax Services Office during a telephone conversation on October 2, 2002:
·
he knows the
Appellant and Yvonnette Côté‑Létourneau because they are his clients;
·
he agreed to be a
trustee of the Létourneau Family Trust because [TRANSLATION] "there was a
need for trustees";
·
he has no role,
rights or powers in or over the Létourneau Family Trust;
·
the Appellant and
Yvonnette Côté‑Létourneau are the only decision‑makers and
administrators in respect of the Létourneau Family Trust;
·
At the time that the
Létourneau Family Trust was created, Mr. Wall signed a document in which he delegated
all his rights and powers as a trustee to the Appellant and Yvonnette Létourneau,
but he does not have this document in his possession;
·
Mr. Wall was not
involved in any meetings of the Létourneau Family Trust and had no contacts regarding
the management of the Trust's affairs; and
·
Mr. Wall never made
any decisions with the Appellant and Ms. Côté‑Létourneau concerning
the Létourneau Family Trust or Serge Racine's tax planning.
The issuance of shares
by 9061 on March 30, 1998
(x) On March 30, 1998, 9061 issued shares in the following manner:
Class
"E" non-voting shares
·
10 Class
"E" preferred shares were issued to Serge M. Racine for
$10
·
Mr. Racine transferred
these shares to the Létourneau Family Trust
·
9061 repurchased
these shares
·
9061 issued 10 Class
"E" shares to the Appellant Mr. Létourneau
Class
"F" non-voting shares
·
9061 issued 10 Class
"F" preferred shares to Yvonnette Côté‑Létourneau
Class
"A" voting shares, Class "B" non-voting shares and Class
"C" voting shares
·
100 Class
"A" voting shares were issued to the Létourneau Family Trust for $100
·
100,000 Class
"B" non-voting preferred shares and two Class "C" preferred
shares (100 votes per share) were issued to the Centre in consideration of the
assignment of a $100,000 claim initially payable by the Appellant and Ms. Côté‑Létourneau
to the Centre
The disposition by the Appellant and Yvonnette
Côté-Létourneau, to the Centre, of their holdings of Class "B"
shares of the share capital of the Centre on March 30 and April
10, 1998
(y) On March 30, 1998, the Appellant and Ms. Côté‑Létourneau each
disposed of 50 of their 500 Class "B" shares in the share capital
of the Centre, and, in consideration, each received a $50,000 promissory note.
(z) On March 30,
1998, 9061 redeemed and cancelled the 100,000 Class "B" shares of its
share capital held by the Centre in consideration of the redemption and
cancellation, by the Centre, of the 100 Class "B" shares of its share
capital held by 9061.
(aa) On
March 30, 1998, the Appellant, Ms. Côté-Létourneau, and
9061 effected a set-off and cancelled the $100,000 debt that the Appellant owed
9061 as well as the $100,000 debt that 9061 owed them (which debts are referred
to in subparagraphs 15(x) (last paragraph) and 15(y).
(bb) On April 10,
1998, the Appellant and Ms. Côté-Létourneau each disposed of their remaining
450 Class "B" shares in the share capital of the Centre, 9061 acquired
these shares, and, in consideration, the Appellant and Ms. Côté‑Létourneau
each received a $450,000 promissory note.
Other transactions
(cc) On March 30, 1998, the Centre issued 120 Class "G" voting
shares to 9061.
(dd) On April 10,
1998, the Centre issued 125 Class "E" voting and
non-participating shares to 9061 for $125.
(ee) On April 10, 1998, 9061 redeemed the two Class "C" shares
held by the Centre for $2.
(ff) On April 11,
1998, the 900 Class "B" shares of the share capital of the
Centre, held by 9061, were split into 900,000 Class "B" shares.
Redemption
of Class "B" shares and repayment on promissory notes
(gg) During
its fiscal year ended March
31, 1999, the Centre
redeemed 571,000 Class "B" shares, held by 9061, for $571,000.
(hh) During its
fiscal year ended March 31, 2000, the Centre redeemed 225,000
Class "B" shares, held by 9061, for $225,000.
(ii) According to
the financial statements of 9061 as at March 31, 2001 and March 31, 2002, 9061
still held 104,000 Class "B" shares of the Centre.
(jj) Over the
course of the fiscal years ended March 31, 1999, 2000,
2001, and 2002, and in the manner set out below, 9061 gradually repaid the
Appellant on the debts totalling $500,000 ($50,000 + $450,000) and gradually repaid
Ms. Côté‑Létourneau on the debts totalling the same amount:
|
Repayment of debts by 9061
according to its financials:
|
Yvonnette Côté‑Létourneau
|
Appellant
|
|
As at March 31, 1999
|
$254,208
|
$250,209
|
|
As at March 31, 2000
|
$152,500
|
$152,499
|
|
As at March 31, 2001
|
$74,216
|
$70,537
|
|
As at March 31, 2002
|
$19,076
|
$26,755
|
|
TOTAL REPAID:
|
$500,000
|
$500,000
|
Non-arm's length
relationship upon the dispositions of the Class "B" shares on
March 30 and April 10, 1998:
(kk) The
March and April 1998 transactions involving the Centre, 9061 and the Létourneau
Family Trust were part of the tax plan that Serge M. Racine prepared
for the Appellant and Yvonnette Côté‑Létourneau, and did not require
any negotiations in order to proceed.
(ll) When the
dispositions were made on March 30 and April 10, 1998,
·
the Appellant and
Yvonnette Côté‑Létourneau were trustees of the Létourneau Family Trust;
·
the Appellant and
Yvonnette Côté‑Létourneau were the sole directors of the Centre, whose
Class "B" shares, having a value of $1,000,000, were held by 9061;
·
the Appellant was the
director of 9061 and Ms. Côté‑Létourneau was its president;
·
9061 was the sole
beneficiary of the Létourneau Family Trust;
·
the shares of 9061 were
the only assets of the Létourneau Family Trust; and
·
the Appellant and Ms.
Côté‑Létourneau had de jure and de facto control over the Létourneau
Family Trust, 9061 and the Centre.
(mm) The Appellant and
Ms. Côté‑Létourneau made all the decisions for the Centre, 9061 and the
Létourneau Family Trust.
Connected
corporations
(nn) Immediately
after the Appellant's disposition of the 50 Class "B" shares in
the share capital of the Centre and the receipt of those shares by 9061 on
March 30, 1998, 9061 held "more than 10% of the issued share capital (having full voting
rights under all circumstances)" of the Centre, and "more than 10% of the fair
market value of all of the issued shares of the capital stock" of the
Centre.
(oo) Immediately
after the Appellant's disposition of the 450 Class "B" shares of the capital
stock of the Centre and the receipt of those shares by 9061 on
April 10, 1998, 9061 held "more than 10% of the issued share
capital (having full voting rights under all circumstances)" of the Centre
and "more than 10% of the fair market value of all of the issued
shares of the capital stock" of the Centre.
Calculation of the
deemed dividend
(pp) The Minister
calculated the ACB of the Class "B" shares, the grossed-up dividend
and the tax credit in the following manner:
Calculation of the ACB of
the Class "B" shares according to paragraph 84.1(2)(a.1) of
the ITA
|
ACB
less
Deduction claimed under s. 110.6 of the
ITA
prior to applying the 75% rate:
ACB of Class "B" shares for
the purposes of
|
$500,000
$355,839 x 4/3 = $474,452
$25,548
|
section 84.1 of the ITA
Calculation of the deemed dividend under
paragraph 84.1(1)(b) of the ITA
|
FMV of consideration
other than shares received
ACB under section
84.1(2)(a.1) of the ITA
Amount of deemed
dividend
Dividend gross-up:
125% x $480,431
|
$500,000
$25,548
$474,452
$593,065
|
Calculation of dividend tax credit: section
121 of the ITA:
|
Dividend tax credit:
|
13.33% x $593,065
|
$79,056
|
Waiver
(qq) On
April 11, 2002, the Appellant signed a waiver of the normal reassessment
period, thereby enabling the Minister to make the reassessment of July 14, 2003 for the 1998 taxation year, in relation
to the 1994 and 1995 "crystallization" and the 1998 tax planning.
[8] The facts referred
to in subparagraphs (a) through (j), (l), (n) through (p), (r) through (u),
(x) through (z), (aa), (cc) through (jj) and (nn) through (qq) were admitted
to. As for the facts referred to in subparagraphs (k), (m), (q), (v), (w), (bb),
(kk), (ll) and (mm), they were denied.
[9] At the beginning of
the hearing, the Appellants abandoned their argument concerning the limitation
period. The issue is essentially about the sale, in two successive stages, of
the 500 Class "B" shares of the Centre to 9061; about whether this
transaction triggers section 84.1 of the Income Tax Act
("the Act"); and lastly, about the imposition of a deemed
dividend justifying the notices of assessment under appeal.
[10] Over the years, the
Appellants developed a very trusting relationship with Bertrand Wall, a chartered accountant by training. The firm in which Mr. Wall
was a partner had a great deal of expertise concerning the management of nursing
homes for people with decreasing autonomy and the accounting services that such
homes require; he was also an excellent advisor to the Appellants.
[11] The Appellant said
that he met with Mr. Wall regularly and spoke with him on the phone often.
For Mr. Wall, the Appellant's file was anything but one among many; it was
quite clearly an important file that he knew well.
[12] At one point, Mr.
Wall advised the Appellants to consult with someone in order to develop a tax
plan that would save them taxes.
[13] On Mr. Wall's
suggestion, the Appellants met with lawyer Serge Racine. They mandated him
to prepare a tax plan, which they approved after obtaining answers to some of
their concerns.
[14] The plan that Mr. Racine
submitted to the Appellants provided for the creation of a family trust. Thus,
a trust was created, and Mr. Wall, the accountant, was appointed as one of the
three trustees, the other two being the Appellants.
[15] The assessment made
by the Minister of National Revenue ("the Minister") relied, in part,
on the facts obtained during the telephone conversation between the auditor Marie‑Claude Poitras
and Mr. Wall.
[16] The tenor of the
conversation, discussed in detail at the hearing, was, in fact, reproduced as
follows at paragraph (w) of the Reply to the Notice of Appeal:
[TRANSLATION]
·
he knows the
Appellant and Yvonnette Côté‑Létourneau because they are his clients;
·
he agreed to be the
trustee of the Létourneau Family Trust because [TRANSLATION] "there was a
need for trustees";
·
he has no role,
rights or powers in or over the Létourneau Family Trust;
·
the Appellant and
Yvonnette Côté‑Létourneau are the only decision‑makers and
administrators in respect of the Létourneau Family Trust;
·
At the time that the
Létourneau Family Trust was created, Mr. Wall signed a document in which he
delegated all his rights and powers as trustee to the Appellant and Yvonnette
Létourneau, but he does not have this document in his possession;
·
Mr. Wall was not
involved in any meetings of the Létourneau Family Trust and had no contacts in
respect of the management of the Trust's affairs; and
·
Mr. Wall never made
any decisions with the Appellant and Ms. Côté‑Létourneau concerning
the Létourneau Family Trust or Serge Racine's tax planning.
[17] Naturally, the
Appellant Mr. Létourneau denied this account of the contents of this telephone
conversation, although he was neither a party to it nor present when it took
place.
[18] Upon being asked to
provide his version of the facts set out in the Reply, Mr. Wall discussed
the background and what he considered to be the very special circumstances.
Among other things, he said that he was hard of hearing and that this sometimes
made it difficult for him to understand things properly.
[19] He also said that he
was at his private home and that it was very early in the morning; thus, he
might have made statements that were confused, inappropriate, or even at odds
with reality.
[20] Nonetheless, he did acknowledge
that he was a trustee of convenience; and in the light of the following excerpt
from his testimony, there is no doubt about this.
October 23, 2006 – Transcript,
at pages 140-142
[TRANSLATION]
Q. Tell me, Mr. Wall,
you also told Ms. Poitras that you signed a document in which you
delegated your rights and powers as a trustee to Mr. and Mrs. Létourneau,
is that correct?
A. Yes. But I never
signed that document. I had signed such a document in another trust, and I got
mixed up at one point.
Q. And why would you
delegate your powers?
A. In other trust?
Q. Well, actually, why
did you tell Ms. Poitras that you delegated your powers?
A. Well, it's because
she was bombarding me with questions. At one point...
Q. She was bombarding
you?
A. Well, I mean...
Q. You couldn't call
her back?
A. Call her back? I
wasn't thinking that I would have to call her back later.
Q. You told her that
you agreed to be a trustee of the Létourneau Family Trust because there was
a need for trustees. Is that correct?
A. Well, it's because...
Q. Is that correct?
A. Yes, there was indeed a need for trustees.
Q. You told her that you had no role, rights or
powers in or over that trust, right?
A. Oh yes, I might have said that.
Q. That Mr. and Mrs. Létourneau were the Trust's
only decision-makers and administrators. You told her that?
A. Yes.
Q. That you were not involved in any meetings.
None. That you had no contracts for the purpose of discussing the affairs of the
Trust. We're still talking about the same period, now.
A. We had no face-to-face meetings, but in terms
of ... we talk over the telephone.
Q. But no contacts for discussion purposes?
A. Well, there were no formal meetings.
Q. Yes, but, isn't contact over the phone still
contact?
A. Well, I assumed that contact was...
Q. That contact meant physical contact?
A. Yes.
Q. O.K. And that you never made any decisions
with Mr. and Mrs. Létourneau with respect to the trust or the tax planning?
A. None with respect to the tax planning.
Q. What about the trust? You said not the trust,
either.
A. Well, I'm not the one who formed the trust.
Q. You're not the one who formed it, but that was
not the nature of the statement that you made to her. You told her that you
made no decisions with respect to the trust.
A. Well, there are no decisions...
Q. To make?
A. No direct ones, because we had no formal
meetings for the trust, but, indirectly, since I am on the file, and I am
always asked...
Q. When you say that you are on the file...
A. Well, in the sense that 9061 and either the
St-Joseph Trust ... for those things, I am the one who does the accounting.
. . .
October 23, 2006 – Transcript, at page 145
A. What
were you expecting? What kinds of decisions?
Q. Yes.
A. I had no decisions per se to make in
9061. I am 9061's accountant.
Q. Very well. And if I understand correctly, in
9061, you had — and tell me whether I am using the right term — you
caused an issuance examination report concerning the financial statements to be
produced?
A. Yes.
Q. And you produced an audit report concerning
the Centre's financial statements?
A. Yes.
Q. O.K. And as far as you're concerned, there is
no conflict involved in being a trustee and issuing reports concerning 9061's
financial statements?
A. No.
Q. And why is that?
A. Well, because, in ... I was a trustee, it's
the trust, not the actual trustee, that was the shareholder. It wasn't me
personally.
[21] Ms. Poitras was called
to testify about Mr. Wall's role in the trust, as defined by the famous
telephone conversation. She was very clear on the subject; her answers were
completely unambiguous.
[22] Ms. Poitras
also stated that the questions addressed to Mr. Wall had been prepared in
advance as part of the preparation of the telephone conversation; thus, this
was not an interpretation that became hesitant by virtue of the passage of
time.
[23] She also testified
that, contrary to what Mr. Wall has stated, he was the one who initiated
the conversation. She had first tried to reach Mr. Wall by phone, but was
unsuccessful. She left a message with the phone number at which she could be
reached. And the conversation took place on Mr. Wall's initiative,
contrary to what he said.
[24] The excerpts from
the telephone conversation reveal a lot about Mr. Wall's true role, especially
since, in the first part of his testimony, he answered in a very questionable
manner, frequently referring to mistakes, forgetfulness, and the fact that the
conversation took place very early in the morning, all of which is rather
unusual language for an accountant who probably knows the file better than the
Appellants themselves.
[25] Thus, he had the
Appellant's file at his office or private residence and could refer to it as needed.
[26] Faced with these
contradictory explanations, I unhesitatingly accept the version provided by Ms.
Poitras and reject that of Mr. Wall. I do so for the following reasons:
·
Her
testimony was precise, she testified with assurance, and she had written notes
concerning the contents of the telephone conversation.
·
Mr. Wall
was hesitant and uncomfortable and was clearly trying to avoid certain
questions; on several occasions, he tried to discredit the answers that had
been given to Ms. Poitras, on the pretext that he was somewhat confused
because of the context, his hearing problem and the early hour at which the
conversation took place.
·
Apart
from these elements, which obviously favour the auditor's version, the overall
context shows that the auditor's version is much more credible than that of the
accountant, who clearly tried, throughout his testimony, to provide
precise answers to some questions and very confused answers to others. I found
it truly astonishing that an accountant with Mr. Wall's experience could
have very precise recollections of certain facts and a completely deficient
memory with respect to others, especially those which have major consequences
on the outcome of the appeal.
·
The
fact that there was a business relationship between the Appellant and
Mr. Wall, that they had known each other for nearly 20 years and that they
had numerous and regular communications, warrants the raising of the following
question:
(A) At the time that the Appellants transferred
their shares to the 9061 management company, did they deal with 9061 on a
non-arm's-length basis, in which case the tax consequences provided for in section 84.1
of the Act apply?
[27] In order to answer
this question, we must begin by considering the conditions under which the
statutory provision in issue, namely subsection 84.1(1) of the Act,
applies:
SECTION
84.1: Non-arm's length sale of shares
(1) Where
after May 22, 1985, a taxpayer resident in Canada (other than a
corporation) disposes of shares that are capital property
of the taxpayer (in this section referred to as the "subject
shares") of any class of the share capital of a corporation resident
in Canada (in this section referred to as the "subject
corporation") to another corporation (in this section
referred to as the "purchaser corporation") with which the
taxpayer does not deal at arm's length and, immediately after the
disposition, the subject corporation would be connected (within the
meaning assigned by subsection 186(4) if the references therein to "payer
corporation" and to "particular corporation" were read as
"subject corporation" and "purchaser corporation"
respectively) with the purchaser corporation,
. . .
[Emphasis
added.]
[28] The conditions under which the consequences
of this subsection apply are therefore as follows:
a.
A taxpayer (other than a corporation) resident
in Canada disposes of shares;
b. The shares are capital property of the taxpayer;
c. The shares are a class of the share capital of a corporation
resident in Canada (hereinafter
the "subject corporation");
d. The shares are disposed of to another corporation (hereinafter the
"purchaser corporation");
e. The taxpayer does not deal with the purchaser corporation at arm's
length;
f. Immediately after the disposition, the subject corporation is
connected with the purchaser corporation. (See D.
Lacroix, "Mise à jour sur l'article 84.1 L.I.R." in Congrès 2002
(Montréal: Association de planification fiscale et financière, 2002), 31:1, at
page 31:3).
[29] In the case at bar,
a. The
Appellants are taxpayers
resident in Canada;
b. The Appellants disposed of shares, specifically, Class "B" shares
of the Centre, which are shares of a corporation that is also a resident of Canada, and that corporation became the
"subject corporation".
c. Those shares were disposed of to another
corporation, namely 9061, the "purchaser corporation"
in this situation.
d. Immediately after the disposition, Centre
and 9061 were connected corporations, because 9061 owned more than 10% of the Class
"B" common shares of the Centre. In particular, they were related under
subsection 186(4) of the Act, which provides:
SECTION 186: Tax on assessable
dividends
(4) Corporations connected with a
particular corporation.
For the purposes of this Part, a payer corporation [i.e. subject corporation]
is connected with a particular corporation [i.e. purchaser corporation] at
any time in a taxation year (in this subsection referred to as the
"particular year") of the particular corporation if
(a) the payer corporation [subject corporation] is
controlled (otherwise than by virtue of a right referred to in paragraph
251(5)(b)) by the particular corporation at that time;
(b) the particular corporation [purchaser
corporation] owned, at that time,
(i) more than 10% of the issued share
capital (having full voting rights under all circumstances) of
the payer corporation, and
(ii) shares of the share capital of the payer
corporation having a fair market value of more than 10% of the fair
market value of all of the issued shares of the share capital of the payer
corporation.
[Emphasis added.]
[30] The only condition in issue here is whether
9061, the purchaser corporation, dealt with the Appellants on a non-arm's
length basis when the transactions of March 30 and
April 10, 1998, took place.
[31] In deciding this issue, one must first examine
the "arm's length" concept contemplated in section 251 of the Act.
[32] Let us begin with subsection 251(1), as it
read in 1998:
SECTION 251: Arm's
length
(1) For the purposes of this Act,
(a) related persons shall be deemed not to
deal with each other at arm's length;
(b) it is a question of fact whether
persons not related to each other were at a particular time dealing with each
other at arm's length.
[Emphasis added.]
[33] Thus, in order to
determine whether persons are not dealing with each other at arm's length, we
must determine what "related persons" are. And the definition of
"related persons" is set out in subsection 251(2) of the Act. It is only if persons are
not related under subsection 251(2) that we must consider the concept
of de facto non‑arm's length relationship contemplated in
paragraph 251(1)(b) of the Act.
i - "Related persons" who are not at
arm's length from each other: paragraph 251(1)(a) of the Act
[34] Subsection 251(2)
of the Act lists all situations
in which persons are related:
SECTION 251: Arm's length
(2) Definition of "related
persons" For
the purpose of this Act, related persons", or persons related to each
other, are
(a) individuals connected by blood
relationship, marriage or adoption;
(b) a corporation and
(i) a person who controls the
corporation, if the corporation is controlled by one person,
(ii) a person who is a member
of a related group that controls the corporation,
(iii) any person related to a person
described in subparagraph (i) or (ii);
(c) any two corporations
(i) if they are controlled by the
same person or group of persons,
(ii) if each of the corporations is
controlled by one person and the person who controls one of the corporations is
related to the person who controls the other corporation,
(iii) if one of the corporations is
controlled by one person and that person is related to any member of a related
group that controls the other corporation,
(iv) if one of the corporations is
controlled by one person and that person is related to each member of an
unrelated group that controls the other corporation,
(v) if any member of a related group
that controls one of the corporations is related to each member of an unrelated
group that controls the other corporation, or
(vi) if each member of an unrelated
group that controls one of the corporations is related to at least one member
of an unrelated group that controls the other corporation.
[Emphasis added.]
[35] Subparagraph 251(2)(b)(ii) of the
Act, a provision the application of which will be analysed below, provides that
a corporation is related to a person who is a member of a related
group that controls the corporation.
[36] "Related group" is defined in
subsection 251(4) of the Act:
SECTION 251: Arm's length
(4) Definitions concerning groups. In this Act, "related
group" means a group of persons each member of which is related to
every other member of the group;
[Emphasis added.]
[37] Since Mr. and Mrs. Létourneau are spouses,
they are related under paragraph 251(2)(a) of the Act because they
are connected by marriage. And, being related, they form a related group.
[38] Consequently, the next thing to be
determined is whether the related group consisting of the Appellants controls 9061.
If so, the group is related to 9061 and is not at arm's length from it.
[39] It should also be noted that subsection
251(5) provides clarifications about related groups, contemplated in subsection
251(2), that control a corporation. It provides as follows:
SECTION 251: Arm's length
(5) For the purposes of subsection (2) and the
definition of "Canadian-controlled private corporation" in
subsection 125(7):
(a) where
a related group is in a position to control a corporation, it shall be deemed
to be a related group that controls the corporation whether or not it is part
of a larger group by which the corporation is in fact controlled.
. . .
[Emphasis
added.]
[40] Thus, under this provision, even if the
Appellants are part of a larger group (consisting of the Appellants and
Bertrand Wall) which controls the corporation, the Appellants, assuming
they are in a position to control the corporation alone, will be
considered a related group that controls 9061.
[41] In order to determine whether the
Appellants control the corporation, we must now turn to the concept of control.
[42] It must be noted that "control"
for the purposes of this provision is de jure control, that is to say, legal
control, as discussed by the justices of the Federal Court of Appeal in SMX Shopping Centre Ltd. v. Canada,
2003 FCA 479:
20
Subsection
251(2) of the Income Tax Act specifies the relationships that must exist
between persons if they are to be considered related to each other for income
tax purposes. Paragraph 251(2)(a) provides that persons who are
connected by blood, marriage or adoption are related to each other. Thus, Amir
Malekyazdi, his wife Mahin-Touss Malekyazdi, and their four children are
related to one another. A corporation is related to each member of a related
group that controls the corporation (subparagraph 251(2)(b)(ii)), and is
also related to any person who is related to any member of that related group
(subparagraph 251(2)(b)(iii)). A related group is defined in
subsection 251(4) as a group of persons each member of which is related to
every other member. "Control" in this context is de jure
control. In the case of SMX, de jure control is in the hands of
a related group consisting either of Amir Malekyazdi and his wife, Mahin-Touss
Malekyazdi, who are the legal owners of the SMX shares, or their four children,
who are the beneficial owners. In either case, SMX is related to Amir
Malekyazdi.
[Emphasis added.]
[43] The Income Tax Act does not define
the concept of de jure control. Rather, the case law has defined the
tests that are used to determine whether a person is in a position to control a
corporation. In Duha
Printers
(Western) Ltd.
v. Canada, [1998] 1 S.C.R. 795, the Supreme
Court of Canada summarized the other decisions on the
subject. The following is the relevant excerpt from the Court's decision:
(3) Summary of principles and conclusion as to
control
85 It may be useful at this stage to
summarize the principles of corporate and taxation law considered in this
appeal, in light of their importance. They are as follows:
(1) Section 111(5) of the Income Tax Act contemplates
de jure, not de facto, control.
(2) The general test for de
jure control is that enunciated in Buckerfield's, supra:
whether the majority shareholder enjoys "effective control"
over the "affairs and fortunes" of the corporation, as manifested in
"ownership of such a number of shares as carries with it the right
to a majority of the votes in the election of the board of directors".
(3) To determine whether such
“effective control” exists, one must consider
(a) the
corporation's governing statute;
(b) the
share register of the corporation; and
(c) any specific or unique limitation
on either the majority shareholder's power to control the election of the board
or the board's power to manage the business and affairs of the company, as
manifested in either:
(i) the constating documents of
the corporation; or
(ii) any unanimous shareholder
agreement.
(4) Documents other than the share register, the
constating documents, and any unanimous shareholder agreement are not generally
to be considered for this purpose.
(5) If there exists any such limitation as
contemplated by item 3(c), the majority shareholder may nonetheless possess de
jure control, unless there remains no other way for that shareholder to
exercise "effective control" over the affairs and fortunes of the
corporation in a manner analogous or equivalent to the Buckerfield's
test.
[Emphasis added.]
[44] In the case at bar,
the Létourneau Family Trust
has the power to elect 9061's board of directors because it holds 100% of the common
voting shares of 9061. Consequently, it has de jure control over 9061.
Given these circumstances, we must determine who controls the trust, or, in
other words, who makes the decisions about the trust, in order to determine who
controls 9061.
[45] Before we consider the attributes of a
trust in order to determine who controls the trust, it is important to discuss
the decision in Canada v. Consolidated Holding Co., [1974]
S.C.R. 419, where Judson J. stated the following, at pages 422-424, with
respect to the determination of the control of a company where the shareholders
are the trustees of a trust that controls that company:
In determining whether a group of persons
controls a company, it is not sufficient in the case of trustees who are
registered as shareholders to stop the inquiry at the register of shareholders
and the Articles of Association. It is necessary to look to the trust instrument to ascertain whether one or more of the trustees
have been put in a position where they can at law direct their co-trustees as
to the manner in which the voting rights attaching to the shares are to be
exercised.
From the point of view of the company, apart from protective provisions, trustee
shareholders must vote as a unit. If they are not unanimous, the shares cannot
be voted. In this event, the control would be in
"Consolidated", the two shareholders of which are the two Gavin
trustees. Merely to look at the share register is not enough when the question
is one of control.
[Emphasis
added.]
The problem here is not solved by a decision
that a company is not bound to see to the execution of trusts to which its
shares are subject or that it may take the vote of the first named trustee on
its share register. These are merely protective provisions in favour of the
company and do not touch the question of control. Here, if one looks at the
facts as a whole, one finds that the two Gavins, by combining, can control the
vote of the estate shares. They already control the voting of
"Consolidated". In this case, therefore, both corporations are
controlled by the same group of persons, namely the two Gavins. They are, in
the words of Abbott J. in Vina Rug (Canada) Ltd.
v. Minister of National
Revenue,
in a position to control at least a
majority of votes to be cast at a general meeting of shareholders.
I do not think that the decision in
I.R.C. v. J. Bibby & Sons Ltd. establishes anything more than
this proposition--that a person who is the registered owner of 50 per cent of
the shares with voting rights controls the company and that it is immaterial
whether or not his exercise of that voting power can be controlled either by co‑trustees
or through appropriate proceedings by order of the Court. It does not establish
the proposition that in a case such as this, where two trustees have the power
to subject a third trustee in the exercise of the voting rights of the shares,
one must disregard that power.
[46] A trust is a patrimony by appropriation
codified by the civil law applicable to the case at bar. Articles 1260 and 1278
of the Civil Code of Québec, S.Q. 1991, c. 64 (C.C.Q.) discuss
the powers of trustees:
1260. A
trust results from an act whereby a person, the settlor, transfers property
from his patrimony to another patrimony constituted by him which he
appropriates to a particular purpose and which a trustee undertakes
[s'oblige], by his acceptance, to hold and administer.
1278. A trustee has the control and the exclusive
administration of the trust patrimony, and the titles relating to
the property of which it is composed are drawn up in his name; he has the
exercise of all the rights pertaining to the patrimony and may take any
proper measure to secure its appropriation.
A trustee acts
as the administrator of the property of others charged with full
administration.
[Emphasis
added.]
[47] The trustees are the
decision-makers, and therefore exercise the voting rights attached to the
shares held by the trust. As far as the Létourneau Family Trust is concerned, we must examine
the provisions of the trust that will be set out below in order to determine
who the trustees are and how they exercise their voting rights.
[48] The trust
instrument, which can be found at tab 10 of Exhibit I‑1,
provided, inter alia:
[TRANSLATION]
ARTICLE VII – TRUSTEES' POWERS
7.1
In addition to all other powers conferred on the
Trustees by the provisions of the Civil Code of Québec, the Trustees, by
virtue of this Trust, have the power, at their complete discretion, to
administer the Trust Property at any time and in any manner whatsoever and
exercise all the powers that an owner can generally exercise over his property.
In addition, and without limiting the scope of the foregoing, the Trustees
exercise the following powers on a unanimous basis:
. . .
ARTICLE X – APPOINTMENT AND RESIGNATION OF TRUSTEES
10.1
I appoint Marcel Létourneau, Yvonnette
Côté and Bertrand Wall as Trustees.
10.2
In the event of the death or the refusal or
incapacity to act of one of the Trustees, or upon notice in writing given by Marcel Létourneau
or Yvonnette Côté, or in the event of their death or incapacity, upon written
notice given by their liquidator, a replacement shall be appointed. If any
other vacancy occurs and a replacement is not appointed, any interested person
may apply to a judge of the Superior Court to have one appointed.
10.3
The Trustees may, without the permission of a
court, renounce their charge after having accepted it.
10.4
A Trustee who becomes incapable, bankrupt or
insolvent shall be removed ipso facto from his or her position as
trustee.
10.5
Any Trustee who ceases to reside in Canada shall be removed from his or her
position as trustee.
10.6
The Trustees may delegate their powers to third
persons for specific purposes only; they do not have the power to effect a
general delegation, except to one or more Trustees who are neither a Settlor
nor a Beneficiary.
[Emphasis added.]
[49] Since it is the
trustees who exercise the powers related to the shares held by the Trust, we
must examine their rights, and the powers provided for, in order to assess the
control over 9061, since the trust itself holds 100% of the voting shares of 9061.
[50] As the Supreme Court
held in Consolidated
Holding, supra, in
determining the issue of control through a trust, one must examine the trust
instrument. The Appellants submit that since the decisions had to be unanimous
at all times, they were unable to control the trust alone.
[51] I agree with this submission. Our task is
not to infer de facto control, but, rather, to examine all factors
relevant to the de jure control of the corporation. Who was in a
position to elect 9061's board of directors? The three trustees were in such a
position, and they had to do so unanimously.
[52] Thus, since it
cannot be held that the group consisting of Mr. and Mrs. Létourneau had de jure control over
9061, the conditions established by the foregoing provisions are not met.
ii De facto non-arm's length relationship:
paragraph 251(1)(b) of the Act
[53] We must now consider
the question of the de facto arm's length relationship. In order to determine
whether the Appellants were, on the facts, in a non-arm's length relationship
with 9061, it is important for us to consider the remarks made by Bowman J.
(now Chief Justice of this Court) in RMM Canadian Enterprises Inc. v. Canada, No. 94-1732(IT)G, April 10, 1997:
It is true that a
determination whether persons are at arm's length requires that the court make
findings of fact, but whether, on the facts, there is in law an
arm's-length relationship is necessarily a question of law. Even
Parliament which, subject to constitutional limitations, is supreme and has the
power to deem cows to be chickens, cannot turn a question of law into a
question of fact. All that paragraph 251(1)(b) means is that in
determining whether, as a matter of law, unrelated persons are at arm's length,
the factual underpinning of their relationship must be ascertained.
The meaning of "arm's length" within the Income Tax Act is
obviously a question of law.
[Emphasis added.]
[54] In addition, Bonner J., in McNichol v.
Canada, No. 94‑1577(IT)G, January 17, 1997, went
over the factors to be considered in deciding whether or not parties are, de
facto, dealing with each other at arm's length:
Three criteria or tests are commonly used to determine whether
the parties to a transaction are dealing at arm's length. They are:
(a) the existence of a common mind which
directs the bargaining for both parties to the transaction,
(b) parties to a transaction acting
in concert without separate interests, and
(c) "de facto"
control.
The common mind test emerges from two cases. The
Supreme Court of Canada dealt first with the matter in M.N.R. v. Sheldon's
Engineering Ltd. At pages 1113-14 Locke J., speaking for the Court, said
the following:
Where corporations are controlled directly
or indirectly by the same person, whether that person be an individual
or a corporation, they are not by virtue of that section deemed to be dealing
with each other at arm's length. Apart altogether from the provisions of that
section, it could not, in my opinion, be fairly contended that, where
depreciable assets were sold by a taxpayer to an entity wholly controlled by
him or by a corporation controlled by the taxpayer to another corporation
controlled by him, the taxpayer as the controlling shareholder dictating the
terms of the bargain, the parties were dealing with each other at arm's length
and that s. 20(2) was inapplicable.
The decision of Cattanach, J. in M.N.R. v. T
R Merritt Estate is also helpful. At pages 5165-66 he said:
. . .
In my view, the basic premise on which this analysis is
based is that, where the "mind" by which the bargaining is
directed on behalf of one party to a contract is the same "mind" that
directs the bargaining on behalf of the other party, it cannot be said that the
parties were dealing at arm's length. In other words where the evidence reveals
that the same person was "dictating" the "terms of the
bargain" on behalf of both parties, it cannot be said that the parties
were dealing at arm's length.
The acting in concert test
illustrates the importance of bargaining between separate parties, each
seeking to protect his own independent interest. It is described in the
decision of the Exchequer Court in Swiss Bank Corporation v. M.N.R. At page
5241 Thurlow J. (as he then was) said:
To this I would add that where several parties
-- whether natural persons or corporations or a combination of the two -- act
in concert, and in the same interest, to direct or dictate the conduct of
another, in my opinion the "mind" that directs may be that of the
combination as a whole acting in concert or that of any of them in carrying out
particular parts or functions of what the common object involves. Moreover as I
see it no distinction is to be made for this purpose between persons who act
for themselves in exercising control over another and those who, however
numerous, act through a representative. On the other hand if one of several
parties involved in a transaction acts in or represents a different interest
from the others the fact that the common purpose may be to so direct the acts
of another as to achieve a particular result will not by itself serve to
disqualify the transaction as one between parties dealing at arm's length. The
Sheldon's Engineering case [supra], as I see it, is an instance of this.
Finally, it may be noted that the existence of
an arm's length relationship is excluded when one of the parties to the
transaction under review has de facto control of the other. In this
regard reference may be made to the decision of the Federal Court of Appeal in Robson
Leather Company Ltd. v. M.N.R., 77 D.T.C. 5106.
[Emphasis added.]
[55] Thus, we must
analyse the relationship between Bertrand Wall
and the Appellants in order to determine whether they truly were not at arm's
length from 9061.
[56] Before analysing the
three conditions that must be met in order to hold that a de facto
non-arm's length relationship exists, it is important to go over what the
evidence as a whole has revealed.
[57] The Appellant Mr.
Létourneau and his spouse have known Mr. Wall for several years. Over
those years, a special relationship was developed and a very strong bond of
trust was forged. This bond clearly gave rise to a relationship between the
parties that was characterized by forthrightness and in which it was neither
abnormal nor significant for the accountant, in the course of his dealings with
Mr. Létourneau and his wife, to express his disagreement or reservations
about certain plans or ideas.
[58] The evidence also
shows that Mr. Létourneau was an informed and prudent individual who asked the necessary
questions in order to be able to take on the responsibility to make final
decisions. In this regard, the fact that he paid fees to the accountant Mr.
Wall undeniably conferred on him the authority to make any decision having
actual or potential consequences on his assets.
[59] It can also be seen
that the few isolated examples or situations that were described in an attempt
to show that the accountant was genuinely independent are not very persuasive,
though I have no doubt that the accountant could have expressed an unfavourable
opinion about certain ideas or decisions made by the Appellant Ms.
Côté-Létourneau. The only relevant question is this: Who made the decision at
the very end of a situation that called for a conclusion?
[60] With respect to the
transactions involving the purchase and sale of the Appellants' Class
"B" shares by 9061, I am satisfied, in view of the evidence, that
Mr. Wall would never have voted against his clients' wishes. As for the
two transactions of March 30 and April 10, 1998, I am more than satisfied that
Mr. Wall did not have any input as his role was essentially passive.
[61] The truth is that Bertrand Wall did not exercise his powers
as a trustee at all; there was no true decision-making power associated with
his involvement in the trust. Indeed, the content of his telephone conversation
with the auditor showed this very clearly.
[62] The evidence has brought
to light enough facts to answer three questions about the transactions of
March 30 and April 10, 1998:
1.
Did a common mind
direct the bargaining for both parties?
2. Did the parties to the transactions act in
concert without separate interests?
3. Did one of the parties exercise de facto
control over the other?
[63] Did a common mind direct the bargaining? The issue is who actually made the
decisions for 9061. In view of the evidence, Mr. Wall was not involved in
the decision-making at all; while the trust instrument provided that the decisions
had to be made unanimously, I find that Mr. and Mrs. Létourneau were
the only ones who decided that 9061 would purchase their shares. Mr. Wall might
have had and expressed reservations or hesitations, but, ultimately, he would
never have dared to vote against Mr. and Mrs. Létourneau, who would not
have acquiesced in such conduct by the accountant to whom they were paying fees.
[64] Since they were
"sellers" to the same extent as they were "purchasers", I find
that the same minds directed the bargaining on these transactions. Lastly,
nothing could have prevented the transaction between the Appellants and 9061
either on March 30, 1998, or on April 10, 1998, because, in my
opinion, they directed the bargaining for both parties.
[65] The next question is
whether the parties to the two sale transactions were acting in concert
without separate interests. The
comments made above apply here as well. Since both parties to the transactions
were the same people, they were obviously acting in concert without separate
interests.
[66] Lastly, did the
Appellants in fact control 9061? If so, they are deemed not to have been dealing
with each other at arm's length.
The evidence has shown, on a balance of probabilities, that Mr. Wall's
role was a role of convenience. Mr. and Mrs. Létourneau did in fact control 9061.
[67] Consequently, I find
that there was indeed a non-arm's length relationship.
(B) Can
it be claimed, in the alternative, that section 84.1 of the Act does not
apply because the Appellants never acquired the shares of the Centre?
[68] It is important to
refer to the provision on the basis of which the Appellants submit that the
shares had to be acquired by them in order for a dividend to be deemed as part
of the calculation of the adjusted cost base of the shares sold:
SECTION 84.1: Non-arm's length sale
of shares
(1) Where after May 22, 1985 a
taxpayer resident in Canada (other than a corporation) disposes of shares that
are capital property of the taxpayer (in this section referred to as the
"subject shares") of any class of the capital stock of a corporation
resident in Canada (in this section referred to as the "subject
corporation") to another corporation (in this section referred to as the
"purchaser corporation") with which the taxpayer does not deal at
arm's length and, immediately after the disposition, the subject corporation
would be connected (within the meaning assigned by subsection 186(4) if the
references therein to "payer corporation" and to "particular
corporation" were read as "subject corporation" and
"purchaser corporation" respectively) with the purchaser corporation
. . .
(2) For the purposes of this section,
(a) . . .
(a.1) where a share disposed of by a taxpayer was acquired
by the taxpayer after 1971 from a person with whom the taxpayer was not
dealing at arm's length, was a share substituted for such a share or was a
share substituted for a share owned by the taxpayer at the end of 1971, the
adjusted cost base to the taxpayer of the share at any time shall be deemed to
be the amount, if any, by which its adjusted cost base to the taxpayer,
otherwise determined, exceeds the total of
. . .
[Emphasis
added.]
[69] The Appellants submit that the shares
referred to in paragraph 84.1(2)(a.1) of the Act were never acquired by
them. The Appellants owned the shares of the Centre because they subscribed
to the shares upon their issuance, not because they acquired the shares. Their
position is based on the following argument: in order for shares to be acquired,
there must be a corresponding disposition, but the Centre never disposed
of these shares, and merely issued them.
[70] I do not agree with this analysis. It is
sufficient to consider the definition of the word "acquisition" in
order to dispose of this question.
[71] First of all, it should be noted that the
word "acquisition" is not defined in the Income Tax Act. Consequently,
one can refer to Hubert Reid, Dictionnaire de droit québécois et canadien,
3d ed. (Cowansville, QC: Wilson & Lafleur, 2004), at page 12,
which states as follows:
[TRANSLATION]
Acquisition
¨
1. The fact of becoming an owner of property or
a holder of a right.
¨
2. A transaction by which a person becomes the
owner of property or holder of a right.
[72] Similarly, Paul Robert, Le grand Robert
de la langue française, Dictionnaire alphabétique et analogique de la langue
française, 2d ed., vol. 1 (Paris: Dictionnaires Le Robert,
1985) defines "acquisition" as follows at page 92 and "acquérir"
[acquire] as follows at page 91:
Acquisition, n.
¨
1. Act of acquiring
Acquire, v.tr.
¨
1. To become the owner of property or a right.
[73] The Appellants did
indeed acquire the shares of the Centre in 1983 because they became the
owners of the shares upon subscribing for them.
[74] Since all the conditions set out in
section 84.1 of the Act have been met, the Minister correctly revised the
adjusted cost base of the shares that the Appellants sold to 9061 and correctly
deemed a dividend.
CONCLUSION
[75] The appeal is
dismissed, with costs to the Respondent in only one matter.
Signed at Ottawa, Canada, this 4th day of May 2007.
"Alain Tardif"
Translation
certified true
on this 30th day
of March 2010.
François Brunet, Revisor
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